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Why Shares of Mohawk Are Soaring Today

By Lou Whiteman – Jun 23, 2020 at 3:17PM

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Conditions are tough. But perhaps not as tough as some have feared.

What happened

Shares of Mohawk Industries (MHK -1.18%) were up 11.65% at 3:10 p.m. EDT on Tuesday despite mixed commentary from the analyst community. The stock is down 25% year to date, even after the jump, on fears that COVID-19 and an economic slowdown will eat into flooring demand. But investors -- at least on Tuesday -- appear more interested in an optimistic outlook than a pessimistic one.

So what

It's been a rough year for Mohawk shareholders, with the shares losing half of their value in late February/early March on fears the pandemic would crimp construction and renovation work, thereby eating into demand for flooring products.

A man measures carpet for installation

Image source: Getty Images.

The stock has come back some along with the economy, but the worries remain. Deutsche Bank lowered the stock to a sell from a neutral on Tuesday, arguing that flooring is likely to be the most challenged building product category over the next six months or more due to its discretionary nature.

Deutsche Bank in its downgrade warned that consensus 2021 earnings estimates for Mohawk could be 30% too high.

But that fear is already priced into the stock, and investors seemed more fixated on a separate report by Cleveland Research arguing that Mohawk revenue is holding up better than expected in the current quarter. Cleveland, which rates Mohawk as a neutral, said that a combination of improved demand in the U.S. and pent-up demand in Europe is supporting sales.

Cleveland Research said it believes Mohawk's revenue could decline about 15% to 20% year over year in the second quarter, better than the 35% decline the company forecast back in April.

Now what

The consensus is that times are tough for Mohawk. The debate is about how difficult current conditions are and how long those conditions will last.

Mohawk shares today are relatively inexpensive, trading at nine times earnings compared with the nearly 15 times earnings multiple the stock enjoyed last fall. But given the uncertainty about the pandemic and the outlook for the economy, I would avoid rushing in to buy, even if the outlook is not as grim as some had feared a few months ago.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Mohawk Industries, Inc. Stock Quote
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